The use of leases is widespread as a means of acquiring assets, and where such leases provide for payment of substantially the entire cost of an asset during the lease term, the lease has properly been viewed as a form of debt financing, not substantially different from a mortgage in its operating effects. While there has been wide acceptance of the concept of leasing as a form of debt financing, a satisfactory technique for evaluating financial leases has proved to be somewhat elusive. The problem lies in the determination of the "cost" of a lease as compared with debt. It is simple enough to compute the Implicit interest included in the lease payments, but this is insufficient since the use of a lease causes changes in the tax cash flow of the firm. In most textbooks, the analysis of financial leases has generally involved calculating the cash flow, after taxes, of the lease and of the alternative loan, and then discounting these cash flows at the cut-off rate or the cost of capital.

The article reports on the basis of accounting theory. In 1966, after two years work, a committee of the American Accounting Association issued "A Statement of Basic Accounting Theory." Undoubtedly, the most startling recommendations were the sanctioning of current costs and the advocacy of two column (historical and current) reports. To this member of the committee, however, even more startling was that the near unanimous agreement on the recommendations was arrived at by following two very divergent paths originating from two very dissimilar basic concepts about accounting. The "Value" school within the committee, or as they would probably prefer to be termed the "User need" school, assumed that users' needs are known and sufficiently well specified so that accounting theory can deductively arrive at and produce optimal input values for used and useful decision models. Most of the value theorists visualize accounting's purpose as producing optimum income and capital value or values. Proponents of the "Events" theory suggest that the purpose of accounting is to provide information about relevant economic events that might be useful in a variety of possible decision models. They see the function of accounting at one level removed in the decision-making process.

The article presents information on information economics and its implications for further development of accounting theory. In 1966 the American Accounting Association (AAA) issued, "A Statement of Basic Accounting Theory," in which it said, essentially, accounting is an information system. More precisely, it is an application of a general theory of information to the problem of efficient economic operations. It is the purpose of this paper to take the AAA Statement seriously, and to examine whether useful developments might take place in accounting theory if one forced an interaction between it and the economic theory of information. The paper begin by setting out the assumptions that will be used throughout. Many people will find that they cannot accept some or all of the assumptions used in this paper, nevertheless it seems sensible to try for lucidity in setting forth the assumptions, since it permits the reader to have his reservations consciously evoked. Otherwise, there is the danger of ending up in arguments over conclusions that are in reality arguments over premises. After these preliminaries, the study turns to an exposition of the Information Economics model and the same framework is then adapted to an examination of the accounting model as a special case. This provides the opportunity to make some brief comments about accounting systems as seen from this new vantage point.

The assumptions underlying the expectations theory of the determination of relative yields on default free securities differing only with respect term maturity may be summarized as follows:' 1. A set of identical expectations regarding future short term interest rates is held with complete confidence by the owners of a large proportion of the bond market's funds.2 2. There are no costs associated with trading in securities. 3. Investors maximize return over a horizon at least as long as the longest term security outstanding. These assumptions have been construed by I. Fisher, J. R. Hicks, and F. A. Lutz imply a market equilibrium in which the relation between yields at time t on securities maturing at times t+ 1 and t+n depends upon the yields expected prevail on one-period securities maturing at times t+2, t+3, * * , t+n. But it will be shown below that the traditional formulations rest upon an implicit fourth assumption: 4. Investors, when selecting their optimal portfolio at a given point in time, consider themselves bound hold each security purchased until maturity.3 The primary purpose of the present paper is demonstrate that assumption 4 is necessary the results of Fisher, Hicks, and Lutz and that, if we discard this assumption in a world of zero transactions costs and risk indifference-the FisherHicks-Lutz world-equilibrium relationships depend only upon interest rate expectations one period in the future rather than upon interest rate expectations several periods into the future. In other words, the traditional theory, in which investors are assumed forecast rates to Kingdom come [13, p. 18], implicitly requires that they be precluded from disposing of securities prior maturity. A theory of the term structure of rates in which investors are not so constrained, but which retains assumptions 1-3, must involve only oneperiod forecasts. This is shown in Part II after an examination in Part I of the underpinnings of the traditional theory. Some concluding comments are contained in Part III.